At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Strategic Education Inc (NASDAQ:STRA) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Strategic Education Inc (NASDAQ:STRA) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 13 hedge funds' portfolios at the end of March. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Grocery Outlet Holding Corp. (NASDAQ:GO), SiteOne Landscape Supply, Inc. (NYSE:SITE), and Intercorp Financial Services Inc. (NYSE:IFS) to gather more data points. Our calculations also showed that STRA isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
[caption id="attachment_256989" align="aligncenter" width="400"] Dmitry Balyasny of Balyasny Asset Management[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 18 cities with the best air quality to identify emerging trends that are likely to lead to 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we're going to view the recent hedge fund action encompassing Strategic Education Inc (NASDAQ:STRA).
What have hedge funds been doing with Strategic Education Inc (NASDAQ:STRA)?
At Q1's end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards STRA over the last 18 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Jeffrey Ubben's ValueAct Capital has the number one position in Strategic Education Inc (NASDAQ:STRA), worth close to $90.8 million, comprising 1.3% of its total 13F portfolio. On ValueAct Capital's heels is Renaissance Technologies, which holds a $83 million position; 0.1% of its 13F portfolio is allocated to the company. Other peers with similar optimism comprise D. E. Shaw's D E Shaw, Edward Goodnow's Goodnow Investment Group and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Goodnow Investment Group allocated the biggest weight to Strategic Education Inc (NASDAQ:STRA), around 3.49% of its 13F portfolio. Manatuck Hill Partners is also relatively very bullish on the stock, designating 1.67 percent of its 13F equity portfolio to STRA.
Seeing as Strategic Education Inc (NASDAQ:STRA) has experienced falling interest from the entirety of the hedge funds we track, it's easy to see that there was a specific group of hedge funds who were dropping their entire stakes in the first quarter. Interestingly, Mika Toikka's AlphaCrest Capital Management said goodbye to the largest investment of the 750 funds monitored by Insider Monkey, comprising close to $1.1 million in stock. Dmitry Balyasny's fund, Balyasny Asset Management, also dropped its stock, about $0.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks similar to Strategic Education Inc (NASDAQ:STRA). We will take a look at Grocery Outlet Holding Corp. (NASDAQ:GO), SiteOne Landscape Supply, Inc. (NYSE:SITE), Intercorp Financial Services Inc. (NYSE:IFS), and Change Healthcare Inc. (NASDAQ:CHNG). This group of stocks' market values are similar to STRA's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GO,17,102998,3 SITE,19,86260,4 IFS,2,34394,0 CHNG,47,1053748,22 Average,21.25,319350,7.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $319 million. That figure was $229 million in STRA's case. Change Healthcare Inc. (NASDAQ:CHNG) is the most popular stock in this table. On the other hand Intercorp Financial Services Inc. (NYSE:IFS) is the least popular one with only 2 bullish hedge fund positions. Strategic Education Inc (NASDAQ:STRA) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.3% in 2020 through June 25th and surpassed the market by 16.8 percentage points. Unfortunately STRA wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); STRA investors were disappointed as the stock returned 6.3% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
Disclosure: None. This article was originally published at Insider Monkey.